UCLA DEPARTMENT OF ECONOMICS COMMENCEMENT SPEECH TEXT Dr. Michael J.

Burry June 20, 2012 Thank you, Professor Farmer. Class of 2012, congratulations! Its quite an achievement to graduate from UCLA. You know, it is nice to be back in Westwood. I certainly have fond memories of my time here. In many ways, the campus is much the same, but in some ways I can see it is different. I do know your campus life has been much different than mine. Twenty years ago I had no Internet, no smart phone, no cell phone. But I did invest my summer earnings in stocks and futures, and I remember being absolutely starved for information. I had to send away for financial statements, sometimes waiting weeks for a response. And I would take a near daily trip to Westwood to pick up a Wall Street Journal to check yesterdays stock quotes. Today, its much different. Information swarms us. It comforts us. It disrupts us. Its an Age of Infinite Distraction, for those so willing. You are the generation that has had instant messaging, Facebook, Twitter, and Angry Birds nagging your fingertips at every moment. Its been arguably as addictive as any other drug throughout history. And I do imagine it took some terrific willpower during your studies to study. Of course, its not lost on anyone that you started your term at UCLA in the midst of a global financial panic, the consequences of which are far from settled. The fault is not your own, but the future it leaves certainly is. As a result of what happened while you were growing up, you now face a future that will feature either another great recession during your 20s. OR, during your 40s, a US debt-to-GDP ratio exceeding 200%. And thats not me, thats the Congressional Budget Office. Me? I think theyre ignoring reflexivity, and I think you face both. Now Greece was at 160% debt to GDP when the last of its nine lives started running out. From my perspective, this is all the more tragic because the financial meltdown was both predictable and preventable. This was no black swan, and no other serendipitous excuse should be acceptable to anyone. Of late, Europes convulsions are in the news. Even this should not be surprising. Back in 2006, when a bunch of us shorted Portugal, Italy, Greece, and Spain, we called them the PIGS for a reason. I can explain it in one sentence: When the entitled elect themselves, the party accelerates, and the brutal hangover is inevitable. Californians, and indeed all Americans, ought to take note. My career after UCLA arced in such a manner that I found myself right in the middle of the financial meltdown, profiting from it because I had predicted it. I had been a Chicken Little, or a Cassandra; to some, especially in government, Im one lucky SOB. In truth, I was just trying to figure it all out. From my earliest years, I found that life, for all its amazing possibilities, very often does not make sense, and, at least as often, is not fair. Today, it is absolutely not fairthe world you are being dealt. There are many ways to deal with an unfair world. One may tune out, drop out, run away. One may get angry. One may fight. One could do ultimately what I did: Accept the world for what it is, work hard to exploit the opportunities it presents, and try to do so in as just a manner as possible. Now, there are two kinds of working hard - you can work smart or you can work dumb. When I was in sixth grade, my dad dumped a pile of bricks in the backyard. And after school, he had us - me and my brothersmove the bricks to the side yard. The next day he had us move them back to the backyard. The next day, back to the side yard. and so forth. This continued for quite a while. Im not sure what he intended by this. But I did learn that hard work for hard works sake alone would not do.

Later, in observing the tenure system so endemic to academic ventures, I would think to myself, Hey! Theyre just moving a pile of bricks. In fact, I began to doubt traditional education. I committed myself to educating myself as opportunities arose. Still, as I graduated from UCLA, I headed to Vanderbilt Medical School. I had read Liars Poker by Michael Lewis, and it nearly convinced me that even if I could become a great money manager, I should not. Besides, medicine appeared just. My interest in medicine would fade, however, as I studied the economics and regulation of health care while in Chicago in 1994. The government payer would weigh far too heavily on that playing field and I did not think it would be fair enough. So during medical school, I put up a websitesome ideas on stocks and markets. As I graduated medical school in 1997, Microsoft out of the blue offered me a dollar a word to write for the new MSN Money website. Being both wordy and in debt, naturally I said, YES! So therefore during my medicine internship, I wrote for Microsoft, and I ran my website. There were synergies between two of the three, and I had unknowingly found a back door to Wall Street. None of this was nearly as well planned as it seems in retrospect. There were a number of crises, including a divorce, and at one point I was so despondent over my direction that I even applied to law school. Again and again, I figured as long as I kept asking questions and working so hard to answer questions - I would eventually find my way. As I turned 29, I ran out of reasons why I couldnt or shouldnt, and left medicine to start an investment firm. At that point, the decision came very easily. As perhaps should be the case more often than not, I simply weighed the paths before me, without considering the path on which I had been. At Scion Capital, my job 24/7 was to ask questions and seek answers. I mostly examined stocks and bonds as long investments. But one day I came across a subprime Residential Mortgage Backed Securitization. And I wondered if I could figure out any of that. Other questions soon followed. Why are home prices diverging up away from the household income trend line? Answer: If its not income, its leverage. What exactly are the incentives of lenders that make mortgages only to sell them on through to Wall Street? Answer: Volume, at the expense of credit standards. When interest rates bottom, how far could these lenders push mortgage terms in order to keep refinancings, home prices, and loan volumes rising? The answer to this question would put a ticking timer on the boom, and a date on the crash. Back in 2005, other questions stood out. How much is consumer spending dependent on cash-out refinancings? What percentage of jobs are dependent on the assumption of rising home prices? Wont AIG have to start posting massive cash collateral for the first time if it were downgraded?

Is it not worrisome that Fannie Mae cannot find term sheets that describe perfect hedges against its massive mortgage portfolio? Are the ratings agencies so conflicted that they could actually be this blind? In my letters to investors, I described a downturn that would be unprecedented, with no counterpart in the modern era. Wall Streets risk models would fall all at once. And every single CEO and every single politician would be disastrously wrong. I put my money where my mouth was. At its peak, I was short $8.4 billion worth of subprime mortgages and certain financial companies. The most we could lose was less than $100 millionthanks to credit derivatives. And at first, we did lose; it was a negative carry trade. Investors, business partners, and even employees questioned strategy. Lawsuits were threatened. Our distress was reported in the press, and Wall Street looked to squeeze our short. Besides all this, I had to stomach what I knew was coming: a tragic end to the follies. This was not fun. I did not tap dance to work. But the firm survived, we turned the tables on Wall Street, and I became the 1% in a way I never imagined when I was in sitting where you sit today. I had bet against America, and won. In 2010, I published an op-ed in The New York Times posing what I thought was a valid question of the Federal Reserve, Congress, and the President: I saw the Crisis coming, why did not the Fed? Never did any member of Congress, any member of government for that matter, reach out to me for an open, collegial discussion on what went wrong, or what could be done. Rather, within two weeks, all six of my defunct funds were audited. The Congressional Financial Crisis Inquiry Commission demanded all of my emails and lists of people with whom I had conversed going back to 2003. And a little later, the FBI showed up. A million in legal and accounting costs, and thousands of hours of time wasted, all because I asked questions. It seemed they would pump me at gunpoint, or not at all. That summer, the Federal Reserve put out a paper that concluded nothing in the field of economics or finance could have predicted what happened with regards to the housing bust and subsequent economic fallout. Ben Bernanke continues to backfill this logic, and I fear that history is being written wrong yet again. But ignorance is willful. As we move forward as a country, it is worth considering mainstream economics and finance in light of recent events. Our nations economic policies are borne of a synthesis of theories on how to deal with the Great Depression of the 1930s, yet seems unable to honestly examine the most recent one. Sadly, at the highest levels of economic thought and government, questions are not tolerated. It is as if we are dealing with the binary judgment of a fundamentalist religion. Finance theory and practice fare no better. The continuing crisis makes a mockery of the principles which have guided credit policy and risk management since the 1960s. As it turns out, information is not perfect. Volatility does not define risk. Markets are not efficient. The individual is adaptable. But the Dark Ages of Finance allow no such light. Mainstream economists and finance practitioners, please check your premises. You have contradictions before you. Truthfully, I do not expect much to change. Practically speaking, history has demonstrated the ability of sovereign nations to justify themselves and to postpone the moment of crisis. This will be even more true for the United States, as the largest economy by far, with the strongest central bank.

As a result, over the course of your lives, you will experience withering but stealthy attacks on your quality of life, as government attempts to manage its faltering finances. You will see declines in the quality of health care, the quality of education, the quality of public safety, and the quality of our currency. Of course, this is a false prophecy. I am simply describing what is already happening. Class of 2012, by graduating today, you are taking a stepanother stepon a path that is fairly well worn; a path that in and of itself defines little about your future. Many have started from where you start today and done great and wonderful things. But many, too, have lived lives of another sort. Whatever you see as the next obvious step, consider whether you are being true to yourself, your strengths, your weaknesses, your needsbefore you take it. The next decade or so, before you have kids, before you get married, is the most flexible, most genius decade of your life. You ought consider stepping outside your paradigm for a fresh look now and again. If you are considering a career on Wall Street or in Washington, DC, you should be aware of the social proof that operates there. This is that many if not most people will be doing questionable things that obviously make money, and that obviously earn respect from common peers. If you find yourself in such a place, I would ask you to consider a rule I learned as a physician: First, do no harm. Besides, life is not that short. Life is well and long enough for you to come to regret any activity or habit involving an exchange of long-term risk for short-term benefit. This is what many if not most Americans did during the refinancing and consumption boom of the last decade, and it was what our government did in egging on the boom. This is also the gospel of drunk drivers and cheating spouses. Of course, when you encounter the oppositethe short-term risk exchanged for long-term benefit consider hitting that button again and again and again. Past may be prologue, but this is not true for the individual. The individual can think different, and the individual can act different, than those that got us all into this mess. No matter how the economic tides may sweep away the majority, an individual can stand clear. Each of your lives, individually, is an epic chance. You can leave here today and you can choose to never stop learning, never to stop asking questions. I must say, it will not be without staggering difficulties. There will be times when you will stare at yourself in the mirror and wonder, Why? But faced with a setback, you will be most creative. Under stress, you will think better, and act stronger. So much so, that looking back, it will seem as though it was all meant to be. Thank you and good luck.